UBS to face royal commission over $1.2 billion loan to PNG

A heavyweight Australian legal team has been appointed to help run a royal commission in Papua New Guinea, which will investigate a contentious $1.2 billion loan advanced by the Sydney office of UBS to the former government of Peter O'Neill.

In a further sign of intent from the new Marape government in Port Moresby, retired Australian Federal Court judge John Gilmour, QC, will sit as a "second commissioner" alongside chairman Sir Salamo Injia.

Perth barrister Matthew Howard, SC, has been appointed counsel assisting the royal commission, while his junior counsel is fellow West Australian Alexander Mossop.

Papua New Guinea Prime Minister James Marape has beefed up the royal commission with the appointment of an Australian judge and barristers. AAP

In announcing the appointments yesterday, Sir Salamo said foreign expertise was necessary given the "international dimensions of the UBS transactions".

Justice Gilmore spent 11 years as a Federal Court judge following a career as a barrister and currently specialises in commercial arbitration.

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Mr Howard has been a Senior Counsel for the last decade, is vice-president of the Australian Bar Association and an adjunct professor at the University of Western Australia.

The 2014 UBS loan was used by PNG to buy a 10 per cent stake in the ASX-listed Oil Search. But when the oil price fell sharply later that year PNG was forced to sell its stake and is estimated to have lost $420 million on the deal.

The loan is believed to be one of UBS' most profitable transactions, netting the firm more than $100 million in fees and interest.

While the commission will investigate how UBS came to extend the loan and if any laws were broken in the process, its terms of reference are suitably broad to allow related transactions to be scrutinised.

Series of deals

This is expected to see a broader investigation into the series of deals which ultimately created the Papua LNG project and could see the commission extend its inquiries to Oil Search's $US900 million purchase of a stake in the Elk Antelope gas fields from a Swiss investor.

Mr O'Neill has said the state's investment in Oil Search was "the right decision at the time" but was undermined by "unforeseen global factors and baseless political opposition".

In announcing the commission soon after coming to power in May, Prime Minster James Marape said it would be "digging deeper" into the "entire UBS transaction".

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The Prime Minister also indicated the commission would take its inquiries beyond PNG to Australia and Singapore.

This could see hearings conducted in Australia, although it is unclear at this stage how any jurisdictional issues might be overcome and whether witnesses would be compelled to appear.

The former head of investment banking at UBS, Guy Fowler, and the outgoing chief executive of Oil Search, Peter Botten, are among a host of private sector figures who may be called.

The advice given by law firms Ashurst and Norton Rose, along with accounting firm KPMG, is also likely to be examined by the commission.

"The proposed commission provides a welcome opportunity for there to be a further, independent review of matters relating to PNG's governance of its strategic investments," UBS has previously said in a statement.

Adverse findings

It made adverse findings against Mr O'Neill, Mr Marape, who was finance minister at the time, and a handful of senior bureaucrats. Mr Marape said he was confident about his role in the matter and would step down if it was deemed to be improper.

The Ombudsman said the UBS loan should have been approved by Parliament and may also have breached PNG's responsible lending laws and its overseas borrowing provisions.

The Ombudsman does not have the power to examine the role played by those outside government, which is why Mr Marape has convened the royal commission.

Legal experts said it was likely to examine the role played by UBS and the advice it relied on to execute the loan, while also looking at any dealings by Mr O'Neill, who was the main advocate for buying the stake in Oil Search.

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Angus Grigg is an investigative reporter based in Sydney. He has worked as a foreign correpondent in China and Indonesia, and has won two Walkley Awards. Connect with Angus on Twitter. Email Angus at agrigg@afr.com

The development of alternative supplies of critical minerals, as well as other joint efforts by Australia and the United States to address Chinese influence in the region, will dominate talks in Washington.